One of my most financially helpful, but polarizing articles is The 1/10th Rule For Car Buying Everyone Must Follow. I wrote this post to help mostly younger folks not blow their money on the most common financial destroyer. We all know that almost all cars are guaranteed to lose value.
As a young man, I used to view my Toyota Corolla Hatchback as an asset because I didn’t know better. How could a car be a liability when I could take girls out on dates, drive to William & Mary from the DC-area to get a solid education, and take a nice midnight jaunt along the Jamestown river during final exams?
Now I view my vehicle as a liability. All I see in my garage is a large heap of metal necessary to transport my family safely. I’ve got to keep feeding it money in order for it to run – gas, new tires, maintenance, tax, tickets, accidents, and insurance. I’d much rather have the money sunk in my car producing passive income for financial freedom.
For those of you curious about what it’s like to follow the 1/10th Rule For Car Buying for the past 15 years, let me give you an honest assessment as an ex-car fanatic who has owned a dozen cars in his lifetime. The journey just might save you a lot of money and bring you more happiness in the process.
What It’s Like Driving A Car Way Below Your Means
Bottled Up Desire To Splurge: 22 – 25 Years Old (1999 – 2002)
The first thing I wanted to buy after I got my first real job was a nice car. Even after working minimum wage jobs during the summers and winters in high school, I couldn’t afford to spend more than $3,000 on a vehicle.
It wasn’t until I got a raise and a promotion to join a new firm in San Francisco in 2001 that I finally had enough money to go big. Go big I did by purchasing a $75,000 Mercedes G500 SUV. Just a year earlier, the car cost $150,000 because a dealer in Santa Fe, New Mexico had exclusive import rights until Mercedes bought them out. What a great deal for half off!
I regretted my decision several months later because I was spending $720 a month to finance the vehicle. I had traded a perfectly fine 1995 Nissan Pathfinder for $10,000 to take on so much debt. I was probably only making about 2X the cost of the vehicle and felt stupid still renting a one bedroom apartment for $1,800 a month. My financial priorities were askew.
A year and a half later, I sold the G500 for a $17,000 loss because it wouldn’t fit in the garage of a condo I wanted to buy. Although this was an expensive lesson, I bought the condo for $580,000, and decided to never spend more than 10% of my income on a vehicle ever again!
2002 was the birth of the 1/10th rule for car buying. But only after I started Financial Samurai in 2009 did I put the rule in writing.
Lessons learned: Don’t buy new. The depreciation curve is too aggressive. Consider buying a 3-5 year old car instead. Further, fight the urge to buy a car before you’re 25, especially if you have school debt. Take public transportation, rideshare, or ride with friends. After at least three years of work, you’ll appreciate the value of a dollar more and hopefully shun expensive vehicles.
Came To A Compromise. 26 – 27 Years Old (2003 – 2004)
I went from a brand new $75,000 Mercedes G500 to a seven-year-old Honda Civic sedan worth $7,500 after I bought the condo. I loved the Honda Civic so much because it reminded me of my childhood, but I was embarrassed to drive it around as third-year Associate in investment banking. Investment bankers are supposed to wear tailor-made suits, drive fancy cars, and eat dry age steak dinners.
I never wanted to talk about cars with anyone since I never wanted to tell anybody what car I drove. It was a pretty macho environment on the trading floor where guys would constantly make fun of each other for whatever reason. One close friend drove a BMW X5 and another friend drove a Mercedes E-Class Coupe. Both made less than I did. Their splurges made me want to splurge again, but I still felt stupid from my G500 purchase, so I held strong.
As a compromise, I sold the Honda Civic a year later on Craigslist and bought a used 1997 BMW M3 for $14,000. It was black on black with aftermarket wheels and tinted windows. Ah, finally! I felt like I could be proud of my car again. I was driving a lot during this time period because I was going to UC Berkeley part-time for my MBA. Classes were in Berkeley one week and in the South Bay every other week. It felt good to drive a sports car to and from San Francisco.
As a 27-year-old who had just gotten promoted, I felt I deserved a car that matched my position at the firm. Having a BMW was good enough to make me feel like I had a nice car again, even though it cost less than 10% of my annual gross income.
Lessons learned: It’s natural to want to own a nice car in your 20s to help boost your stature. The thing is, nobody really cares or expects you to be rich or successful at that age. It’s much more impressive if you drive a beater in your 20s because it shows you have more important priorities. Your bonus or promotion will get chopped if your boss sees you driving a luxury vehicle. You can still get plenty of status points by owning a used luxury brand for less money.
Getting On A Roll. 28 – 35 Years Old (2005 – 2012)
By the time I turned 28, I was feeling pretty confident about my career progression. I had six years of work experience under my belt, got my MBA, and was one year in as a Vice President. No longer did I need a nice car to give me an ego boost. I focused more on utility.
Instead of wanting a nicer car to further boost my ego, I wanted to go the complete other way and start driving a beater again! A coincidence perhaps, but the 1997 BMW M3 also started having some transmission problems. After stretching to buy a single family house in the Marina district, I decided it was best to drive a second-hand car with four-wheel drive capabilities to get up to our place in Squaw Valley, Lake Tahoe.
In 2005, I found the perfect vehicle: a 2000 Land Rover Discovery II that I named Moose. I bought it from a woman who was relocating to Amsterdam for her consulting job. Because her company was paying for all moving expenses, she really didn’t care about maximizing her sale price. I bought the vehicle, which had been under warranty, for $8,000 cash. Score!
It felt awesome to be getting paid 2X more as a VP, living in a nicer property while driving a car 42% cheaper than my previous one. Some would say I was overly frugal, but I loved Moose, and wrote about him for the first five years of Financial Samurai’s life. He confidently drove us through mega storms and never quit on us.
Lesson learned: Do your best to “make it” or be on the right track by 30 with your wealth and with your career. With more money, you’ll start getting hooked on the power of compound returns and passive income. Further, owning a home trumps owning a car for lifestyle and wealth creation since the average person only drives their car for one hour a day. Homeownership is one of the easiest paths to wealth.
Not Caring Anymore. 35+ Years Old
Once I engineered my layoff in 2012, I no longer cared about my image. There was no office to drive to. There were no clients to pick up for an event. It was liberating! Moose, my 14-year-old SUV was finally traded in for $3,000 in 2014 because it had five warning lights flashing on the dashboard. It couldn’t pass smog inspection and I didn’t want to spend at least $1,000 to fix it.
I drove Rhino, my new Honda Fit, with pride for three years. Such an economical city car felt perfect for blending into my new middle-class neighborhood after I bought a fixer in 2014. I didn’t want to attract attention by driving a fancy car.
It felt wonderful being invisible. Driving a regular car also felt great because I put the $235/month lease payment on the business. Yes, a lease is not the most economical way to go, but the lease gave us the convenience of returning the car to the dealer as we were thinking of traveling abroad.
After three years, I returned the Honda Fit back to the dealership and plunked down a wad of cash for a 2015 Tata Motors SUV in December 2016. It had only 11,200 miles on it. It also went through a 200 point inspection at an Audi dealer because that’s where the owner originally planned to sell the vehicle for much more.
Despite the much higher cost, I surprisingly didn’t feel a lick of guilt or buyer’s remorse. I was turning 40 years old and had spent 13 years owning cars worth less than 10% of my annual gross income. I had invested 100% of the money saved in the stock market and real estate market during this time period. Further, I now had a baby to protect at all costs. I wouldn’t be able to live with myself if something were to happen to him in an accident with the Honda Fit.
I love the Tata and plan to drive it until it stops working or until we go on our international adventure. But I’m kind of sad I no longer love cars now that I can afford a nice variety. It was so fun to salivate in magazines or online about all the latest vehicles.
Lessons learned: Once you achieve financial independence, you’re OK with driving something very boring or something really flashy. It doesn’t really matter because you really don’t care what other people think anymore. With a family, your main priorities for the vehicle are safety and reliability. If you can also find a vehicle that looks good and is fun to drive, all the better.
Don’t Waste Money On A Car You Can’t Afford
Even the most economical cars now have fantastic features that were once reserved for luxury vehicles. For example, my Honda Fit had power windows, power locks, Bluetooth, a backup camera, a side view camera, a couple USB chargers, and paddle shifters.
By the time you reach middle-age and beyond, you won’t care as much about material things any longer. You also won’t feel ashamed owning nicer things because you earned the right to splurge. Some of you might even go the complete other way and start simplifying your life for the sake of freedom.
Stick to spending 1/10th your gross income on a car or less. You will be so happy to have saved and invested all that money in the meantime. Cars give you the greatest joy when they are reliable and don’t stress you out financially. Not only will the 1/10th rule prevent you from ever feeling buyer’s remorse, if you want a nicer vehicle, you’ll be motivated to earn more money.
Readers, anybody an ardent follower of my 1/10th rule? If so, I’d love to know what you did with your excess cash and how you feel following my rule. What has your car ownership journey been like? If you’re looking for affordable car insurance, check out Esurance for a free quote.